The influx of ESG regulations presents companies with formidable challenges, not only in operational compliance but also in effectively reporting their sustainability efforts.
What challenges are associated with this, and how can they be overcome? This was the focal point of an intriguing roundtable discussion at CFO Day, facilitated by TriFinance, and featuring HB Antwerp, a disruptive force in the diamond sector positioning itself as an impact company, as a compelling case study.
A regulatory tsunami
Approximately fifteen CFOs representing companies of diverse industries and sizes participated in the discussion. An initial participant poll revealed that the EU's Corporate Sustainability Reporting Directive (CSRD) continues to raise numerous questions. Reporting-related issues span various corporate departments, including accounting, finance, and HR, while clients also express considerable concerns.
"Sustainability is not only a highly relevant topic but also an extensive one," emphasized Filip Ceulemans, Client Partner CFO Services at TriFinance, who facilitated the roundtable. "Based on the introductory round at the table, three key elements emerge: reporting, financing, and achieving sustainability.
As for reporting, we must question the sustainability of the regulatory deluge itself. Currently, the different frameworks (CSRD, GRI, ISSB) have not sufficiently converged, which risks imposing multiple regulations on international players, further adding to their workload. Financing is also crucial. Will non-compliant companies secure financing under the new regulations? Banks, bound by even stricter regulations, will soon be prohibited from lending to unsustainable enterprises. Naturally, this is a concern for shareholders and investors alike. Lastly, we must address the question: do we still possess the energy, time, and resources necessary to fulfill our obligations amidst the sea of regulations? And how do we manage it? Ultimately, this is what matters most: collectively pursuing sustainable practices for our planet."
If you only do it to become compliant, it's wasted energy. It is and should be much more than that.
Mario Matthijs, Expert Sustainability Reporting, TriFinance
His colleague Mario Matthijs immediately sets the tone: sustainability reporting is by no means a compliance project, he says. "If you only do it to become compliant, it is lost energy, because it is and should be much more than that. It's just that we are now in a transition from a number of non-mandatory reporting methodologies and frameworks to a regulated environment. And that's sometimes tricky. Before, for example, companies could report certain facets of their sustainability and not report others on which they scored a little less, so you got all the criticism about greenwashing."
Of the participants at the table, no one said they have to start completely from scratch, but at the final measurement, most are far from it either. "We are not publicly traded, so we have some time," says one CFO of a dairy processing company. "But at the same time, we do feel pressure from customers. We also have targets in terms of CO2 emissions and water consumption, but investing, implementing and reporting, that's another thing altogether."
Other companies say it is not so much regulations that drive them, but that sustainability is in their DNA, such as the CFO of a construction company specializing in student housing. "We have those targets too, but every employee in our company also has to be steeped in it and know what we stand for and where we are going. For example, we have been working for some time with an organization that relies on scientific research and follows the Sustainable Development Goals of the United Nations. That organization measures a lot of things. The important thing is to just start: measure what you can measure, just do it. And don't wait until Jan. 1, 2025."
We control everything, from the mine where we mine the stone to the grinding process. All the stages of a stone's life cycle are logged in a blockchain with some 3,000 data points per stone.
Wouter Pollers, CFO, HB Antwerp
A diamond in the blockchain
At the table, diamond processor HB Antwerp, stood as an example of advanced sustainability and integral business strategy.
"The diamond industry lacks sustainability efforts," says CFO Wouter Pollers. "Our entire business model is built on the idea of giving back as much as possible to the country of origin. To that end, we have completely revised our supply chain. We keep everything under control, from the mine where we dig up the stone to the grinding process. All the stages of a stone's life cycle are logged in a blockchain with some 3,000 data points per stone. We have a stronger belief in that approach than in certificates or being a member of certain organizations. Our blockchain holds indisputable data, ready to be shared with anyone who questions us, providing absolute certainty and transparency in our operations.'
HB also leverages its pricing strategy to differentiate itself from competitors. "If there are two stones, one priced at $100 suspected to be from Russia with uncertain origins, and another stone priced at $105, cut in Europe with complete traceability in the blockchain, we need to convince buyers to invest that extra five dollars," Pollers says. However, our experience across different industries tells us that while customers are willing to pay a premium, there are limits to their willingness. This poses a challenge."
To achieve such transformative changes, a change-oriented mindset must permeate the entire organization. "Over the past three years, we have demonstrated profitability while adhering to our sustainability practices," Pollers proudly states. "We continue to move forward. Within the next two years, we aim to register at least 900 data points solely for sustainability. An average diamond undergoes a journey, traveling around the world 25 or 30 times, from Africa to Hong Kong, then to India, and finally to Antwerp. We have eliminated all of that complexity."
Our customers hold us back from pushing forward
A logistics expert
Sacrificing some returns for a competitive advantage
Not every company can engage its supply chain in sustainability like HB.
"We choose partners carefully," says Positive Impact Director Valerie Geluykens. "Due diligence is crucial throughout the chain, considering the higher CO2 emissions from diamond mining compared to polishing.
If a mine doesn't align with our values, we must make alternative choices. It takes courage to say no, even if it means sacrificing some returns."
"In the long term, the return lost now will bring back double," says Mario Matthijs.
"I expect HB to have a competitive advantage because of this. "HB is making significant progress, although they are not yet fully CSRD-compliant."
HB's case study makes a big impression at the table and prompts the participants to self-reflect. "Our mission has always been sustainable logistics, focusing on train and boat transportation," says a logistics specialist. "But road transport remains a cheaper competitor, posing a challenge. Customers express interest in sustainability but hesitate when they see the price. Investing in electric trucks is an option, but it comes with costs to consider. Our customers hold us back from pushing forward."
We hope customers will recognize the value of avoiding waiting hours on the road and at the port, says a CFO from the logistics sector. A dairy processor shares a similar experience, having introduced CO2-neutral cheese without willingness from retailers to pay more.
"I hope that the turnaround will come when customers realize even more that they are not only paying for the transport, but also the waiting hours on the Antwerp ring road and the waiting hours at the port," responds a CFO, also from the logistics sector. A dairy processor recognizes the situation. "We were one of the first to market a CO2-neutral cheese. Everyone thought that was great, but no retailer wanted to pay more for it."
The frame of reference for sustainable reporting is constantly evolving at a large industrial company in West Flanders. "Compared to four or five years ago, there are heavier investments and obvious capital allocation," it sounds. "We are also doing integrated reporting, including lifecycle assessments on some products. Only, we have more than 22,000 SKUs (Stock Keeping Units, nvdr.). So the question arises: how do you build that? How do you cluster that effectively? How do you also make sure that that input remains quality?"
The contractor in student real estate faces a similar challenge. "Where we didn't have data, in the buildings we monitor the technical systems like water, power and gas. That's literally hundreds of meters that are all read and collected on a platform. There is also a person who is responsible for the quality of all that data. We then put that data into a software by Carbon Alt Delete, a spin-off of the KUL. That is a very simple tool that centralizes all the data and allows reporting according to CSRD."
There also remains the question of how financiers and banks handle the sustainability data. Are they a driving force in the story or are they perhaps more sympathetic to green investments than others, see sustainability linked loans, for example? Their home base plays a role in this, it appears. "We often raise money in the U.S.," says an airport operator. "And there the sustainability issue in financing still plays a lot less of a role than in Europe. There is also still a clear difference between shareholders and financiers. Our shareholders are completely convinced. With some financiers it is sometimes still different."
SUSTAINABLE AND DOABLE
To the final question, "What else can the government do?" Filip Ceulemans replies, "If the government can do one thing, it is to ensure that all possible rules and frameworks (CSRD, ISSB, GRI, you name it) fit together and start speaking the same language. And only then will the regulations themselves become sustainable and doable."
TriFinance was a partner of the CFO Day 2023.